Although the stupefying gains by meme stocks this year have been fascinating, they don’t make sense from a fundamental standpoint. Meme stocks such as AMC Entertainment Holdings, Inc. (AMC), BlackBerry Limited. (BB) and GameStop (GME) have been dominating headlines for some time now due to an explosive surge in their prices spurred by retail trading commentary on subreddit r/wallstreetbets.
And although it might be tempting to jump on the meme-stock bandwagon to capitalize on the trend, betting on them can be extremely risky. That’s because for most meme stocks’ weak fundamentals and financials do not justify their current price levels. Hence, ignoring the hype, we think it is safer and better to invest in stocks that are fundamentally sound.
As U.S. manufacturing and construction activities gradually return to their pre-pandemic levels, betting on industrial stocks Deere & Company (DE), Illinois Tool Works Inc. (ITW), and ABB Ltd (ABB) could be safe and rewarding. Furthermore, the Biden administration’s proposed infrastructure plan could provide a shot in the arm to these companies. Given their solid financials and fundamentals, we believe these stocks have plenty of upside to deliver.
Deere & Company (DE)
DE is a manufacturer and distributor of equipment used in agriculture, forestry, construction, lawn care and commercial mowing. It operates through agriculture and turf, construction and forestry, and financial services segments. In addition, the company provides wholesale financing services to equipment dealers and finances sales and leases of agriculture and other equipment.
This month, DE introduced the latest version of FarmCraft, a Minecraft experience, that will offer gaming enthusiasts modern agriculture through the virtual use of machines. Created in collaboration with Blockworks, this unique interactive platform will enable DE to educate the younger generation on the importance of agriculture.
In May, DE was named a winner by Fast Company in the Corporate Social Responsibility category of the 2021 World Changing Ideas Awards. The recognition was in relation to the company’s recent innovative work with smallholder farm families in Nigeria.
DE’s total net sales and revenues increased 30% year-over-year to $12.06 billion in the second quarter, ended May 3, 2021. The company’s net sales under its production and precision agriculture segment rose 35% from its year-ago value to $4.53 billion, while its operating profit under the same segment rose 77% year-over-year to $1.01 billion. It reported $1.79 billion in net income, compared to $666 million in the prior-year period.
A $4.51 consensus EPS estimate for the quarter ending July 2021 represents a 75.5% improvement year-over-year. Also, DE beat the consensus EPS estimates in each of the trailing four quarters. Meanwhile, the $10.38 billion consensus revenue estimate for the quarter ending September 2021 indicates a 19.8% increase year-over-year. DE’s stock has gained 117.5% over the past year.
DE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Sentiment. We have also graded DE for Quality, Stability, Momentum, Growth, Value and Sentiment. Click here to access all of DE’s ratings.
DE is ranked #26 of 84 stocks in the A-rated industry.
Illinois Tool Works Inc. (ITW)
Founded in 1912, ITW manufactures and sells industrial products and equipment worldwide. The company operates through the polymers & fluids; welding; test & measurement and electronics; food equipment; automotive OEM; construction products; and specialty products segments. It sells its products directly to manufacturers and through distributors.
In the first quarter ended March 31, 2021, ITW’s total revenue increased 10% year-over-year to $3.5 billion. Its operating income came in at $905 million, representing an 18.9% increase from the prior-year quarter. The company’s operating margin rose 190 basis points year-over-year to 25.5%. Its net income came in at $671 million, representing a 18.6% increase of 18.6% from the year-ago value. Also, its EPS rose 19.2% year-over-year to $2.11.
Analysts expect ITW’s revenue for the current quarter, ending June 2021, to be $3.52 billion, representing 37.3% year-over-year growth. ITW has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. The company’s EPS is likely to increase 102% year-over-year to $2.04 for the current quarter. The stock has surged 13.8% year-to-date.
ITW’s POWR Ratings reflect this promising outlook. The stock has a B overall rating, which translates to Buy in our POWR Ratings system. It has an A grade for Quality, and a B for Stability. In addition to the POWR Ratings grades we’ve just highlighted, one can see ITW’s ratings for Stability, Value, Sentiment and Momentum here.
Of the 84 stocks in the Industrial – Machinery industry, ITW is ranked #31.
ABB Ltd (ABB)
Headquartered in Zurich, Switzerland, ABB is a manufacturer and seller of industrial automation, electrification and robotics and motion products for serving the utilities, industry, transport, and infrastructure sectors worldwide. The company offers electric ship propulsion systems, wiring accessories, enclosures and cabling systems, as well as transport systems.
In May, ABB signed an agreement with Chart Industries, Inc. under which ABB will create standard modular controls, power supply and telecoms solutions, and automation for Chart’s modular offerings. This partnership will allow ABB to draw on its extensive experience to deliver innovative solutions and drive business growth.
ABB’s revenue increased 11% year-over-year to $6.9 billion in the first quarter ended March 31, 2021. Its gross profit grew 19% from the year-ago value to $2.27 billion, while its income from operations increased 114% from the year-ago value to $797 million. ABB reported $959 million in operational EBITA, representing a 51% year-over-year increase. Also, the company’s net income increased 34% year-over-year to $502 million over this period.
ABB’s revenue is expected to increase 13.9% in the current quarter ending June 2021 and 5.3% in 2022. A $0.33 consensus EPS estimate for the current quarter represents a 50% improvement from the same period last year. Over the past year, the stock has returned 60.4%.
It’s no surprise that ABB has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The stock has an A grade for Momentum, and a B grade for Growth and Sentiment. Click here to see the additional POWR Ratings for ABB’s Stability, Value and Quality.
In the Industrial – Machinery industry, ABB is ranked #7 of 84 stocks.
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DE shares fell $1.06 (-0.31%) in premarket trading Thursday. Year-to-date, DE has gained 25.12%, versus a 12.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...
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